Canada and Corporate Social Responsibility

The idea of who directors and officers owe a fiduciary duty to has been debated for quite some time, both in the courts and within academia. Although this discussion has received complicated and mixed opinions, the age-old question unfolds rather simply: Does a corporation—its directors and officers included—owe a duty to non-shareholder stakeholders, or is the “best interest of the corporation” only supposed to be reflective of the best interest of its shareholders? Section 122(1)(a) of the Canadian Business Corporations Act, RSC 1985, c C-44 [CBCA] legislates only the latter part of the question, which is the reality of the current Canadian stance relating to the concept of corporate social responsibility: “Every director and officer of a corporation in exercising their powers and discharging their duties shall […] act honestly and in good faith with a view to the best interest of the corporation”.

Corporate Social Responsibility (“CSR”), as defined by the Government of Canada’s Ministry of Foreign Affairs, Trade, and Development, is “the voluntary activities undertaken by a company to operate in an economic, social and environmentally sustainable manner.” Non-shareholder stakeholders in this context are expanded to include the governing values of the society at large. As expected, the broad definition almost begs for a puzzling discussion: scholars, lawyers, and—most importantly—those that run corporations, are left with uncertainty as to how far the fiduciary duty of directors and officers expands.

Conceptualizing the Role of Corporations

In the literature, there are two basic models used to conceptualize the public corporation, as explained by William T. Allen[1]. They are practical, real-world level explanations as to what or for whose benefit those in control of the corporation are supposed to act. The models represent the two extreme ends of the spectrum.

The first model—what he refers to as the property conception model—is the view that the corporation is “seen as the private property of its stockholder-owners.” Thus, the main purpose of the corporation is to the benefit of these owners, which is said to be their financial interests. Also known as the contract model (or the shareholder-primacy model), this view, in its most far-reaching form, allows for the corporation to essentially become a ghost and transform into an institution where “property owners freely contract” within a “stable corner of the market.” The supreme goal of the corporation is to benefit its shareholders, including the board of directors’ duties to assure investors a fair return.

Milton Friedman, a well-established economist and Nobel Peace Prize winner in the 1970s, held a strong opinion in favour of the property conception model and was against the idea of CSR in general. In a New York Times Magazine article, he notes that the corporate manager is the agent of the individuals who own the corporation and thus, his or her primary responsibility is to those owners. He claims that corporate executives who sacrifice profits to make social improvements not demanded by law are stealing from the shareholders. Finally, his views are best demonstrated when he claims that businesspersons who pursue such activity are “preaching pure and unadulterated socialism.”

On the other hand, Allen also describes what he calls to be the social entity conception model (also known as the managerialist conception model or the institutionalist conception model), which is the view that the corporation is not the private property of shareholders, but that it should be viewed as a “social institution.” He notes that the corporation is no longer seen to be private, but “is tingled with a public purpose.” The corporation thus appears as a mechanism to further societal and economic well-being. In this way, the corporation is seen to be able to endure both legal and moral obligations on a much broader level by taking into account all those interested in or affected by the corporation, including non-shareholder stakeholders.

CSR calls for corporations and regulators to view their responsibilities in the light of the second model described by Allen: the social entity conception model. For CSR policies to take effect, the market has to view the interests of non-shareholder stakeholders to be at least equal to (or in some cases, greater than) that of shareholders.

Legal History: The Evolution of the Case Law

To understand the Canadian stance on CSR, it is important to take a look at the evolution of the case law. It brings to light the courts’ confusing directives as to what sort of approach should be taken. Which one of the two theoretical models described above have the courts affirmed?

In examining the legal history behind CSR within Canada, the best place to start is (oddly enough) at the Michigan Supreme Court, with the case of Dodge v Ford Motor Company, 170 NW 668 (Mich 1919) [Dodge]. This was one of the first cases to address the shareholder primacy model. In Dodge, the Ford Motor Company decided that the company would cease paying further large-scale dividends and instead would use its profits to expand operations and manufacture cars at a lower per-unit cost. Ford reasoned that this change would provide jobs to workers and spread the industrial wealth. Two brothers, John and Horace Dodge, claimed that this plan would diminish share value (at least in the short term) and would turn Ford into a charity.

The Dodge brothers argued that Ford had a duty to distribute wealth to its equity holders. The court agreed, and stated the following:

“A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes” (Dodge, para 24).

The case also reaffirms the business judgment rule: it is the doctrine that allows for courts to defer the business judgment of corporate management, in that courts are reluctant to base their rulings on the judgment of what is “good” business. Although this case is cited to support the property conception model, it has been criticized for being portrayed as a “legal mandate.”

The next relevant case to unpack is Teck Corp Ltd v Millar, 1972 CanLii 950 (BC SC) [Teck], decided at the British Columbia Supreme Court in 1972. Teck suggests that directors can consider non-shareholder interests, as illustrated by the following excerpt:

“A classical theory that once was unchallengeable must yield to the facts of modern life. In fact, of course, it has. If today the directors of a company were to consider the interests of its employees no one would argue that in doing so they were not acting bona fide in the interests of the company itself. Similarly, if the directors were to consider the consequences to the community of any policy that the company intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the interests of the shareholders.

[…]

I appreciate that it would be a breach of their duty for directors to disregard entirely the interests of a company’s shareholders in order to confer a benefit on its employees… But if they observe a decent respect for other interests lying beyond those of the company’s shareholders in the strict sense, that will not, in my view, leave directors open to the charge that they have failed in their fiduciary duty to the company.”

This ruling seems as though it is a step towards the social entity model. Although there is no explicit mention of or call for a change in the legislation, the case broke through the “norm” of thinking that a corporation’s sole purpose is to benefit the shareholders. Even if it was incremental, it was novel for its time.

People’s Department Store Inc (Trustee of) v Wise, [2004] 3 SCR 461 [People’s], decided by the Supreme Court of Canada in 2004, related to defining the scope of the fiduciary duties of a corporation’s directors and officers. The Court mainly dealt with standards of duty of care by directors of a corporation, but it had the following to say regarding to whom the corporation is responsible:

“Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase the “best interests of the corporation” should be read not simply as the “best interests of the shareholders”. From an economic perspective, the “best interests of the corporation” means the maximization of the value of the corporation […] However, the courts have long recognized that various other factors may be relevant in determining what directors should consider in soundly managing with a view to the best interests of the corporation. For example, in Teck Corp. v. Millar […] (People’s, para 42)

[…]

We accept as an accurate statement of law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment” (People’s, para 42).

The case, however, does mention that “[t]he interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholders.” The judges made this claim on the rationale that the corporation should not focus on creditors when it starts to struggle. Nonetheless, this seems to be another step—albeit a weak one—toward the social entity conception model.

Current Case Law and Relevant Legislation

The groundbreaking case in regards to CSR and the fiduciary duty of directors and officers came before the SCC in 2008 in BCE Inc v 1976 Debentureholders, 3 SCR 560, [BCE]. The gist of the case is as follows: BCE proposed an arrangement that certain bondholders (the Debentureholders) would significantly disagree with because it would substantially decrease the value of the bonds. The Quebec Court of Appeal ruled that the bondholders—as a type of non-shareholder stakeholder—should have been considered when the board of directors was exercising their fiduciary duty. The SCC, however, overruled, claiming that their fiduciary duty permits, but does not require, consideration of non-shareholder stakeholders:

“The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation. The content of this duty varies with the situation at hand. At a minimum, it requires the directors to ensure that the corporation meets its statutory obligations. But, depending on the context, there may also be other requirements. In any event, the fiduciary duty owed by directors is mandatory; directors must look to what is in the best interests of the corporation (BCE, para 38).

[…]

In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule” (BCE, para 40).

[…]

Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debenture holders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation…” [Emphasis added] (BCE, para 66).

A few questions come to mind after one reads the above excerpt: What exactly did the court intend with its statements? Is this considered a satisfying directive for cases to follow? If so, how? If not, why not and what else is necessary?

The SCC in BCE essentially said that the fiduciary duty allows consideration of non-shareholder stakeholders, but that it is not necessarily required. Furthermore, the court’s emphasis on fiduciary duty demonstrates that if there is a conflict regarding where the fiduciary duty lies, the corporation’s interests are superior to those of stakeholders. This seems like a rather disappointing ruling.

Conclusion

Where does that leave us? Section 122(1)(a) of the CBCA remained unchanged after the BCE ruling. That is not entirely surprising, since the judgment did not render a substantive or novel stance. Although it could be argued that precedents that implement change come in gradual steps, it was as if the SCC chose to side step the opportunity to set the record straight. In a sense, they repeated what we already knew:

“Conflicts may arise between the interests of corporate stakeholders inter se and between stakeholders and the corporation. Where the conflict involves the interests of the corporation, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation, viewed as a good corporate citizen (BCE, para 81).

[…]

Finally, the claim must be considered from the perspective of the duty on the directors to resolve conflicts between the interests of corporate stakeholders in a fair manner that reflected the best interests of the corporation” (BCE, para 111).

The BCE case does not go far enough in establishing that non-shareholder stakeholders’ interests should be taken into account by the directors and officers of corporations. It will only be satisfactory when the Court agrees to allow a disadvantage to shareholders for the benefit of other shareholders—a desperate call to go the extra mile.

The vagueness of BCE leaves us puzzled. Some might argue that the SCC leads us towards the property conception model. However, it stops just short of that because the judgment does allow for consideration of all stakeholders—which includes both non-shareholder stakeholders and shareholders. Arguably, all BCE does is bring us right back to where we started: still questioning whose benefit is in the “best interest” of the corporation.

Others could make the argument that BCE lends itself to the social entity model. This is because it allows future corporations to take matters into their own hands; since the ruling in BCE did happen, corporations are presumptively entitled to consider non-shareholder stakeholders and use that as a defence if their shareholders are not content with their actions. It gives CSR-conscience corporations the megaphone and empowerment they need to fulfill actions for what shareholders might not see as being of direct profit or benefit to them.

This hybrid judgment between the property conception model and the social entity model is more than just frustrating. It sets up the next lawyer who argues for or against the judgment in BCE to fail —unclear directives from case law inherently lead to unclear interpretations of legislation for cases to follow.

[1] William T Allen, “Our Schizophrenic Conception of the Business Corporation” (1993) 14 Cardozo L Rev 262.